Over the course of the last ten days, Ocwen Financial (OCN) and its affiliates have taken a beating from all corners of Wall Street over a letter from the New York Department of Financial Services, which alleged that Ocwen was backdating letters to borrowers.
Ocwen itself announced Thursday that it has booked a $100 million pretax charge for a potential settlement with the NYDFS.
Now, another financial analyst is sounding the alarm on Ocwen. It must be a day that ends in “y.”
This time, Sterne Agee is telling clients that Ocwen’s issues are going to drag down Ocwen’s affiliate Altisource Portfolio Solutions (ASPS).
In the note, Sterne Agee Analyst Henry Coffey said that because almost all of Altisource’s business comes directly from Ocwen, Ocwen’s regulatory concerns are going to have a serious impact on Altisource’s performance going forward.
Coffey said that Sterne Agee is lowering its Altisource price target from $117 to $65. Sterne Agee is also lowering its 2014 earnings-per-share estimate from $8.60 to $7.48 and reducing its 2015 EPS estimate from $9.30 to $6.25.
“The underlying challenge facing ASPS is converting the opportunity created by its partnership with OCN into a business supported by a broad range of other clients and services that reach beyond OCN,” Coffey said. “To date, the company has not been able to jump this hurdle.”
Coffey cites the potential of Hubzu, an Altisource subsidiary that Ocwen uses as its principal online auction site for the sale of its borrowers’ homes facing foreclosure, to bring in additional business, but notes that Hubzu is facing “significant headwinds.”
One of those headwinds is the NYDFS, which has had Hubzu on its radar for some time.
In April, NYDFS Superintendent Benjamin Lawsky sent a letter to Ocwen’s general counsel, stating concerns over the cozy relationship between Hubzu, Altisource and Ocwen.
“Hubzu appears to be charging auction fees on Ocwen-serviced properties that are up to three times the fees charged to non-Ocwen customers. In other words, when Ocwen selects its affiliate Hubzu to host foreclosure or short sale auctions on behalf of mortgage investors and borrowers, the Hubzu auction fee is 4.5%; when Hubzu is competing for auction business on the open market, its fee is as low as 1.5%. These higher fees, of course, ultimately get passed on to the investors and struggling borrowers who are typically trying to mitigate their losses and are not involved in the selection of Hubzu as the host site,” Lawsky’s letter stated.
“The relationship between Ocwen, Altisource Portfolio, and Hubzu raises significant concerns regarding self-dealing. In particular, it creates questions about whether those companies are charging inflated fees through conflicted business relationships, and thereby negatively impacting homeowners and mortgage investors,” Lawsky wrote. “Alternatively, if the lower fees are necessary to attract non-Ocwen business on the open market, it raises concerns about whether Ocwen-serviced properties are being funneled into an uncompetitive platform at inflated costs.”
And considering that Altisource’s share price is so dependent on Ocwen and “the noise surrounding the drama and noise created by the NYDFS,” Sterne Agee warns clients that things may only get worse for Altisource until it finds new sources of revenue.
“Until we see an inflow of independent customers, ASPS's share value and EPS outlook will be dominated by OCN capacity to grow and expand,” Coffey said.
